January 26, 2009 1/29/2009 2 - atis.org ATIS Dallas January 26 2009... · January 26, 2009....

1/29/2009Confidential - Do Not Reproduce 2January 26, 2009

ATIS

LTE Business Case

1/29/2009Confidential - Do Not Reproduce 3

David Waite, Altman Vilandrie & Company (AV&Co.)

Consulting Profile

Background

• 45+ Consulting Professionals

• Headquartered in Boston

Core Capabilities

• Specialists in the Communications, Media, and Technology Sectors

• Analytical Approach to Problem Solving

• Deep Economics and Financial Focus

Client Universe

-1-Operating

Companies

Service Providers (CellCos, ILECs, CLECs, RLECs, IXCs, ASPs/ISPs/MSPs, etc.)

Equipment Vendors

Content Creators and Aggregators

-2-Financial Investors

Private Equity Investors

Hedge Funds

Investment Banks

Topic Overview

Today’s focus is on the LTE business case

What are the revenue incentives and investment implications for operators who adopt LTE?

What is the LTE market opportunity and implications for the broader ecosystem, including equipment providers, operators, and device manufacturers?

How could the current economic climate impact the overall LTE business case?


LTE Evolution

The Approaching Transition from 3G to 4G

20122003 2006 2009Estimated Time of Commercialization

Mob

ile B

andw

idth

Cap

abili

ty (M

bps)

0.01

0.1

1.0

10.0

100+

EVDO-Rev A

EVDO-Rev B

UMB (EVDO-Rev C)

EVDO

UMTS / HSDPA

LTELTELTE

EDGE

HSPA+

Likely Path for

North American

CDMA Operators

Fixed WiMAXMobile WiMAX 4G

3G

Carriers are beginning the transition to 4G


LTE Ecosystem

Network Infrastructure

Providers

Content & Applications Developers

Content & Application Distributors

Device Providers

Component Vendors

Each segment of the ecosystem has a role to play in LTE’s success

• Dual-mode chips to enable seamless 3G/4G coexistence

• Greater computational power on-board

• Improved battery life for media- intensive applications

• Demonstrated potential through 4G lab tests and trials

• Possibly, multi- standard base stations to facilitate migration from and transitional coexistence of 3G to 4G

• Focused efforts to understand & address end-user requirements among consumers and businesses

• Willingness to take measured risks to monetize 4G

• Innovative applications that take advantage of LTE’s bandwidth and latency characteristics

• Rich multimedia content to drive eyeballs to the handset screen

• New, innovative GUI designs to take advantage of rich multimedia content and applications

• Development of new device categories (MIDs) to leverage LTE beyond the handset

http://images.google.com/imgres?imgurl=http://www.pacificnetwireless.com/Metro_logo-1-.jpg&imgrefurl=http://www.pacificnetwireless.com/products.html&usg=__ggS1WIB0APbMl220IA_Zu4nan-o=&h=64&w=223&sz=18&hl=en&start=7&sig2=3mULv_t9ezLAdRvCPd_EAg&tbnid=1AkteUfiuWEG8M:&tbnh=31&tbnw=107&ei=h0o4SYzXC5Gwes-RuZYD&prev=/images%3Fq%3DmetroPCS%2Blogo%26gbv%3D2%26hl%3Den

http://www.intel.com/consumer/learn/wimax.htm

http://www.freescale.com/

http://www.huawei.com/


Success also rests on business case, and underlying economic drivers, for LTELTE Business Case

# Subscribers# Subscribers

ARPUARPU

CPGACPGA

CCPUCCPU

Recurring Margin

Customer Lifetime Value

Confidential - Do Not Reproduce

_

_

x

Customer Lifetime

Customer Lifetime

Total Value(pre-tax,

unlevered)

Total Value(pre-tax,

unlevered)x

Net Customer Lifetime Value

$50

$30

$20 (~40%)

60 months

$1,200

$350

$850

~270 MM, U.S.

~$300 B

Capital Investment

Capital Investment

ROIROI???

???

Directional


Economic Drivers: ARPU


ARPUARPU

CPGACPGA

CCPUCCPU

Recurring Margin



_

_

x

Customer Lifetime

Customer Lifetime

Total ValueTotal Valuex


Capital Investment

Capital Investment

ROIROI

Value-added applications

Advertising revenues

Broadband device proliferation

ARPU stands to benefit from higher-bandwidth, lower-latency platform


Rich Multimedia ContentRich Multimedia Content

Real-time InteractivityReal-time Interactivity

ARPU: Selected LTE Capabilities

Greater User ConcurrencyGreater User Concurrency

More Simultaneous SessionsMore Simultaneous Sessions

New Computational AlternativesNew Computational Alternatives

Greater Mobility, AvailabilityGreater Mobility, Availability

Network-based Location / PresenceNetwork-based Location / Presence

Better Physical World AwarenessBetter Physical World Awareness

Content and applications will benefit from LTE’s capabilities relative to 3G

LTE

- 4G Application Enablers -


2008 2011

LTE?

ARPU: Average ARPU Components

2005

Data($13)

Voice($37)

$50

Data($25)

VoIP($20)

$55

Apps($10)

Data ($5)

Voice($47)

$52 Consumer– Interactive gaming– Mobile TV– Social multi-user video– Mobile commerce

Business– Collaboration– Tele-presence– Telemedicine– M2M– Fleet management– Asset tracking– Interactive sales

Cross-Segment– Customized bandwidth– Remote monitoring– GPS/Navigation

Illustrative,DirectionalIllustrative,Directional

Value-added applications offset ARPU declines in other price components

Consider the opportunity cost of inaction


ARPU: Emerging Mobile Applications

A wide range of vertical and horizontal applications already are emerging

Hor

izon

tal

App

licat

ion

Vert

ical

App

licat

ions

Category

Emergency ResponsePattern RecognitionNavigation and TrackingSurveillanceTelemetry and TelecommandInteractive SalesMachine to Machine

CollaborationComputing and StorageSecurity and MonitoringLocation-based Applications

Example Companies

http://www.appearnetworks.com/

http://www.bcsglobal.com/index.asp

http://www.telstraenterprise.com/

http://www.targetsfa.com/

http://www.koretelematics.com/

http://www.sensorlogic.com/

http://www.cinterion.com/


Economic Drivers: CCPU


ARPUARPU

CPGACPGA

CCPUCCPU

Recurring Margin



_

_

x

Customer Lifetime

Customer Lifetime



Capital Investment

Capital Investment

ROIROI

All-IP networks

Backhaul

Network virtualization

Migration, multiple networks, OSSs, etc.

LTE is likely to reduce operating costs over time, but with caveats

CCPU: Carrier Operating Costs

Switching to an end-to-end IP network with greater spectral efficiency can significantly reduce network expenses

Network Staff19%

Other Operating Expenses

19%

Cell Site Maintence & Rent

35%

Network Expenses

12%

Network Provisioning

5%

Wireless Network OperatorOPEX Breakdown LTE OPEX Impacts

Cell Site• Fewer sites and radios• Reduced maintenance and

part replacement costs

Network Expenses

• Reduced switching and transport costs

• Better able to handle bursts of data

• Reduced backhaul costs (50% by some estimates)

NetworkStaffing

• More remote (i.e., online) maintenance

• Fewer network elements (when fully converted)

Network Provisioning

• Fully IP networks may simplify provisioning

Source: AV&Co. Experience

CCPU: LTE Cost Cushion

Cisco estimates up to 50% savings on backhaul for wireless carriers switching to LTE networks

LTE cost savings have the same EBITDA impact as a ~15% growth in revenue

Example of Potential EBITDA Impact

Sources: Cisco

General Assumptions• Revenue of $40Bn• COGS = 40% of Revenue• Backhaul = 25% of COGS• SG&A = 20% of Revenue

Cost Savings Assumptions• Switching to a 4G network will result in a

50% reduction to backhaul costs

Predicated Cost Savings• Gross margin increases to 65% from

60%• EBITDA margin improvement of 5%

(~40% to ~45%)• Cost savings create EBITDA contribution

equivalent to ~15% growth in revenue

Assumptions

1/29/2009 14

$40 $40

$46

$14.0$16 $16

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

Current With CostSavings

EquivalentEBITDA without

Cost Savings

$B

RevenueEBITDA


Economic Drivers: Churn


ARPUARPU

CPGACPGA

CCPUCCPU

Recurring Margin



_

_

x

Customer Lifetime

Customer Lifetime



Capital Investment

Capital Investment

ROIROI

Sticky 4G applications

More devices per user

Slippery open-access environments

New non-contract pricing models

Customer lifetime may improve, but the outlook remains ambiguous

3.2

3.2

3.3

3.3

3.4

3.3

3.5

3.7

3.8

3.8

3.8

3.9

4.0

4.0

4.2

- 1 2 3 4 5

Difficult to manage professional versuspersonal usage

Lack of IT expertise to managemobility solutions

Scalability

No financing to buy IT/ mobilitysolutions

Flexibility

Hard to develop a mobility strategy forour size business

Unclear about benefits (costs, ROI)

Duration of contract with provider

Affordability: High cost to roll-out for allemployees

Integration concerns

Security concerns

Latency

Bandwidth

In-building coverage

Wireless coverage concerns

Tech

nolo

gica

lB

usin

ess

SMB Mobility Barriers to Adoption

• Limited Network Coverage and Performance – Coverage is critical for businesses to maintain real-time

communication with employees, customers and suppliers

• Security Concerns– Concerns about security of information shared across

wireless networks -beyond the company firewall

• Lack of Device Compatibility & Integration– Workforce has different devices, with different OS

• Cost and Return on Investment– Creating a wireless organization could mean a substantial

investment in technology upgrades of the business

• Business flexibility– Concerns about difficulties in adjust mobile solution to

changes in business needs

• Limited experience in managing mobility– IT department has limited experience/knowledge of

mobile solutions

1

2

3

4

5

5

Source: AV&CO primary research survey, n=500

Don’t forget SMBs and EnterprisesChurn: SMBs, Enterprises


Economic Drivers: CPGA


ARPUARPU

CPGACPGA

CCPUCCPU

Recurring Margin



_

_

x

Customer Lifetime

Customer Lifetime



Capital Investment

Capital Investment

ROIROI

Economies of scale

Customer acquisition

Higher subsidies – open may offset

LTE’s impact on CPGA remains uncertain

CPGA: Economies of Scale

Scale economies from promise to drive down equipment subsidies

0

200

400

600

800

1,000

1,200

1,400

1,600

2002 2003 2004 2005 2006 2007 2008 2009 2010

GSM/WCDMAHandsets

CDMAHandsets

CPGA: Smartphones

Yet, greater adoption of smartphones and other advanced devices may offset benefits from scale economies, at least in the near-term

6

206

406

606

806

1,006

1,206

1,406

2008 2009 2010 2011 2012

Con

sum

er W

irel

ess

Dev

ices

(M)

Smartphones Basic Phones

• Smartphones use more data than basic phones• iPhone users consume 30 times the data of other smart phones users (e.g., Youtube)• Even if smartphone penetration growth slows, existing smartphones are becoming much more

data intensive to match the iPhone


Economic Drivers: Subscribers


ARPUARPU

CPGACPGA

CCPUCCPU

Recurring Margin



_

_

x

Customer Lifetime

Customer Lifetime



Capital Investment

Capital Investment

ROIROI

New applications tap new segments

Greater bandwidth targets performance hold-outs

Machines

MIDs

LTE seems likely to attract new subscribers and more devices per subscriber


Economic Drivers: CapEx


ARPUARPU

CPGACPGA

CCPUCCPU

Recurring Margin



_

_

x

Customer Lifetime

Customer Lifetime



Capital Investment

Capital Investment

ROIROI

Economies of scale

All-IP network & spectral efficiency


Multiple networks in transition

Capital efficiency is set to improve with LTE deployments

CapEx: All-IP

Standardized, IP-based network equipment for LTE will reduce capital costs

Maintenance60%

Network40%

Wireless Network OperatorCAPEX Breakdown

LTE CAPEX Impacts

Cell Site

• Improved spectrum efficiency• Propagation benefits of 700

MHz spectrum• Spectrum flexibility (channel

width, FDD/TDD)

Network Maintenance

• Simpler network architecture• Lower equipment costs resulting

from standardization

NetworkExpansion

• Lower equipment costs resulting from standardization

• Simpler network architecture

Source: AV&Co. Experience

1/29/2009 22

CapEx: Impact of Spectral Efficiency

Improved spectral efficiency of LTE promises to further enhance the capital efficiency of LTE investments

- LTE - - EVDO Rev-A - - HSDPA -

Theoretical Speed

Channel Bandwidth 1.25-20 MHz 1.25 MHz 5 MHz

(Future plans for 10 MHz)

Range 1-30 Miles(theoretical) 1-5 Miles 1-5 Miles

Spectrum Efficiency ~3-5 bps/Hz ~1-2 bps/Hz ~1-3 bps

DL- 3.1 Mbps UL- 1.8 Mbps

DL- 14 Mbps UL- 5.8 Mbps

Expected Speed DL- 5 Mbps DL- 400 kbps DL- 900 kbps

LTE – 3G Comparison

DL- >100 Mbps UL- >50 Mbps

Source: Ericsson, Alcatel, Qualcomm, Wireless World, AV&Co. interviews with RF engineers

1/29/2009 23

Macroeconomic Considerations

Investments may be impacted by the current economic climate

Barriers

Tight credit markets; depressed equity markets; cash is king

Declining consumer demand

Drivers

Operators’ subscription cash flows

Competitive intensity

Market saturation

Wildcards

Economic stimulus

Cost of capital

Macroeconomic Considerations

Despite economic headwinds, participants across the ecosystem are gearing up for LTE

December ’08: Qualcomm laid out an aggressive LTE roadmap (expect to have samples ready by Q209)

December ’08: Alcatel-Lucent announced an increase in LTE investment

November ’08: Motorola completed its first field test for LTE – expect limited LTE deployments in 2009

December ‘08: Nokia demonstrated LTE technology

November ’08: HTC introduced MAX 4G, the world’s first GSM & WiMAX enabled handset in Russia

October ’08: ZTE increases LTE R&D investment as they believe the global recession will not dampen equipment demand for LTE

November ’08: T-Mobile announced plans to forego additional investment into HSPA+ and focus exclusively on LTE

December ’08: Verizon states that LTE service will be launched in 2009 in select U.S. markets

January, ’09: TeliaSonera awards first LTE contract

Conclusions

ARPU

CCPU

CustomerLifetime

CPGA

Sub-scribers

RationalePotential Impact

CapEx

Economies of scale

All-IP network & spectral efficiency


Multiple networks in transition

New applications tap new segments

Greater bandwidth targets performance hold-outs

Machines

MIDs

Economies of scale

Customer acquisition

Higher subsidies – open may offset

Sticky 4G applications

More devices per user

Slippery open-access environments

New non-contract pricing models

All-IP networks

Backhaul


Migration, multiple networks, OSSs, etc.

Value-added applications

Advertising revenues

Broadband device proliferation

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